I am Forbes' Opinion Editor. I am a Senior Fellow at the Manhattan Institute for Policy Research, and the author of How Medicaid Fails the Poor (Encounter, 2013). In 2012, I served as a health care policy advisor to Mitt Romney. To contact me, click here. To receive a weekly e-mail digest of articles from The Apothecary, sign up here, or you can subscribe to The Apothecary’s RSS feed or my Twitter feed. In addition to my Forbes blog, I write on health care, fiscal matters, finance, and other policy issues for National Review. My work has also appeared in National Affairs, USA Today, The Atlantic, and other publications. I've appeared on television, including on MSNBC, CNBC, HBO, Fox News, and Fox Business. For an archive of my writing prior to February 2011, please visit avikroy.org. Professionally, I'm the founder of Roy Healthcare Research, an investment and policy research firm. In this role, I serve as a paid advisor to health care investors and industry stakeholders. Previously, I worked as an analyst and portfolio manager at J.P. Morgan, Bain Capital, and other firms.

In 2007, Harvard Business School professor Regina Herzlinger and McGraw-Hill published Who Killed Health Care? America’s $2 Trillion Medical Problem—And The Consumer-Driven Cure. In the book, Herzlinger describes the health care system of Switzerland as a case study in consumer-driven health care, one that has things for both liberals and conservatives to like (and dislike). Given the fact that both Obamacare’s insurance exchanges and Paul Ryan’s Medicare reform proposals borrow from Switzerland’s model, it’s worth learning from Regi’s research on the topic. Her work has influenced my own thinking about how to use parts of Obamacare to reform Medicare, Medicaid, and the employer-sponsored health care system in the United States. What follows is an edited excerpt from her book and a related 2004 paper from the Journal of the American Medical Association, reprinted with permission from the author.

Switzerland has achieved private-sector universal coverage

Switzerland, the only developed country with a long-standing consumer-driven health care system, provides broad evidence and important lessons about its efficacy. Unlike the U.S. system, in which employers or governments select health insurance, in Switzerland, it is the consumers themselves who purchase their health insurance. The Swiss have considerable experience with some of the consumer-driven insurance policies newly introduced in the United States, such as those with high deductibles.

Switzerland has been politically neutral since at least 1907, unlike most of its European neighbors. It is a haven of quiet in a roiling sea. Its consumer-driven health care system mirrors the country’s traditional independence, as citizens may freely choose plans, and its solidarity, as it requires everyone to purchase health insurance and subsidizes the needy. But it more closely mirrors its neighbors’ centrally controlled health care systems in the constraints placed on insurers and providers.

Swiss consumers, not employers or the government, primarily pay for the country’s health care expenses. In 2000, 43 percent of consumers’ payments were for insurance premiums (about 67 percent of total health care costs), 0.1 percent for deductibles and copayments (about 5 percent of total health care costs), and 28 percent for all other out-of-pocket payments, such as those for over-the-counter drugs (19 percent of the total).

One-fifth of Swiss citizens received government subsidies

The Swiss consumer-driven system directly subsidizes the needy and also assures that sick people do not pay more for health insurance than others. Individual cantons provide tax-financed, means-tested subsidies so low-income individuals can purchase compulsory health insurance. In 2001, 19 percent of the insured received subsidies, and 18 percent of enrollee premiums were government financed. Subsidies are based on a consumer’s income and assets. The subsidy typically equals the average premium in a canton.

No insurance plans offer complete coverage, and the Swiss may not buy insurance for these out-of-pocket payments. The required benefits range from hospital care to health spas. Insurers may also offer supplementary, optional policies for private hospital rooms or child care for sick parents. Demand is thus constrained by governmentally-controlled, mandated coverage and benefits that must be featured in all policies.

Despite their mandated benefits, the compulsory policies offer some differentiation: they include plans with high deductibles, health maintenance organizations (HMOs) that tightly manage access, and bonus plans that reward enrollees who do not use insurance by reducing premiums over five years.

The health insurance plans vary substantially in price. Supplementary plans feature additional differentiation. For example, one popular policy contains a nonsmoker option with savings of up to 20 percent. The largest market share is held by high-deductible plans, while managed care plans have attained a relatively small market share.

Swiss government heavily regulates insurance policies

The Swiss government approves insurance prices. Compulsory insurers are also risk adjusted: those with above-average medical care costs receive transfers from those with lower-than-average costs. For example, in 1999, on average, $541.40 per enrollee in a high-deductible plan was removed from insurers because their enrollees were healthier than average, and it was transferred to the lower-deductible insurers who had enrolled sicker people. The adjustment is based on the insurer’s deviation from the average medical costs for enrollees in 30 different age and sex categories.

The Swiss health care system frees consumer demand much more than supply. The lessons we can draw from Switzerland are thus limited because the Swiss system is not a complete model of consumer-driven health care: demand is constrained by governmental regulation of the design of insurance policies, and supply is constrained by uniform prices paid to doctors. In addition, information about the quality of providers’ services is nonexistent. Nevertheless, it provides important lessons about the impact of consumers’ buying health insurance for themselves.

The Swiss lesson is generally a positive one. Switzerland provides universal coverage at substantially lower cost than the United States while avoiding the quality, responsiveness, equity, and provider compensation concerns of single-payer universal health care systems. However, perhaps because of its constraints on supply and lack of information, inefficiencies remain.

Comparing Swiss health care to that of wealthy U.S. states

The Swiss consumer-driven health care system achieves important, positive results. The general health of the Swiss population is at least as high as that of the U.S. population, while costs and rates of inflation are 40 percent lower as a percentage of the economy. Furthermore, Switzerland has universal coverage, unlike the United States, where more than 40 million people are uninsured.

Swiss health care expenses are considerably lower than not only those of the United States as a whole but also than those of U.S. states with comparable income, levels of education, and race and ethnicity—characteristics that profoundly affect health status. Similarly, the Swiss outcomes for diseases like diabetes, which are linked to the socioeconomic characteristics above, are roughly equal or better. Yet the Swiss generally have more of the resources that are typically considered in cross-national comparisons—such as hospital beds, physicians, and costly diagnostic and therapeutic equipment—than Canada, the United Kingdom, and even the United States.

Last, Swiss physicians are well compensated, although not quite as well as U.S. physicians. (Most other comparisons of U.S. health care outcomes to those of developed European countries fail to adjust for substantial differences in the sociodemographic characteristics among them, such as levels of education, ethnic composition, and income. Because health status is considerably affected by such characteristics, the value of the comparisons in isolating the impact of the health care system on outcomes is limited. The analysis herein, in contrast, compares Switzerland to the U.S. states that most resemble it, such as Connecticut and Massachusetts.)

Small insurers in Switzerland compete well with larger ones

One reason for lower costs is that competition among Swiss insurers has lowered annual insurance administrative expenses per enrollee, while in the United States, they have increased. The Swiss insurance industry demonstrates the viability of small insurers. In 2004, only 17.4 percent of Swiss insurance firms had more than 100,000 enrollees. The administrative economies of scale used to justify a single-payer system are not readily apparent in Switzerland. The administrative costs per enrollee for insurers with fewer than 5,000 members equaled those attained by the large insurers.

Indeed, small insurers frequently earned greater profits per enrollee than those with more than 500,000 members. Another reason for lowered costs is that competition among Swiss physicians caused them to experience sharper reductions in income as their numbers (supply) increased to levels higher than those in Germany, Sweden, and the United States.

Yet in comparison to the United States, resource inefficiencies appear, such as the number of hospitals, and perhaps, hospital admission rates and lengths of stay. These results may be attributable to the government’s excessive involvement in designing the insurance policies and subsidizing Swiss public hospitals and thus sheltering them from competition.

Swiss success dispels concerns about consumer-driven care

Experts have voiced various concerns about consumer-driven health care. I can dispel some of their concerns through findings revealed in studies of the Swiss health care system.

Individuals in the Swiss system can safely and effectively buy insurance from a large number of competent firms.

Concern: “Consumer-driven health care will end health insurance. Healthy people will not buy it, and sick people will not be able to afford it.”

The Swiss system requires universal coverage. Prices to individuals are not risk adjusted. A sick 60-year-old man pays the same price for insurance as a healthy one. But insurers are motivated to provide policies to sick people because their premiums are risk adjusted.

Concern: “Sick people will not receive adequate care in a consumer-driven health care system.”

Sick people, fully insured in Switzerland, have excellent prognoses when compared to patients in similar countries.

Concern: “Consumer-driven health care will create multiple tiers of care, with the poor relegated to the worst.”

The quality of Swiss health care is differentiated primarily by amenities such as patients’ being able to stay in a semiprivate hospital room. Differences in health care utilization by income class are not substantial.

Some Swiss insurers specialize in rural areas, where, presumably, they earn sufficient profit to compensate for their smaller scale. Anecdotal evidence indicates that shortages of care do not occur there.

The U.S. can learn from Switzerland

Switzerland’s universal-coverage health care system consumes a larger fraction of gross domestic product than most other countries, likely reflecting its citizens’ preferences and resources. Health care expenditures are closely linked to income. Yet, in contrast with the United States, whose health care expenditures are the highest percentage of gross domestic product in the world and where more than 40 million citizens are uninsured, the consumer-driven Swiss health care system achieves 30 percent lower per capita health care costs and universal coverage while providing reasonable quality of care.

These results can be attributed primarily to the control exercised by Swiss consumers and the relatively high cost-transparency of the system, requirement for universal coverage, and risk adjustment of insurers. Additional savings would likely be attained with liberalization of provider coverage and reimbursement policies.

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“the consumer-driven Swiss health care system achieves 30 percent lower per capita health care costs and universal coverage while providing reasonable quality of care. These results can be attributed primarily to the control exercised by Swiss consumers and the relatively high cost-transparency of the system, requirement for universal coverage, and risk adjustment of insurers. ”

I agree that each of the factors you name is important.

But I think there are deeper reasons. For example are the Swiss healthier than Americans? Whether that’s so is probably simpler to determine than why – but a healthier population could be expected to have a lesser demand for more costly medical treatment.

Also Switzerland has a population approximately the size of Virginia. That population is not nearly so ethnically diverse as the U.S. population. Moreover, the Swiss population is compressed into an area not much different from Maryland – after considering uninhabited Alpine areas. As a result, Swiss public health issues may be somewhat simpler to manage than those faced in the U.S.

Wouldn’t such demographic factors go far toward explaining why medical care spending per capita is less in Switzerland than in the U.S?

To answer these questions, I consulted my favorite source this morning, and was advised “ signs point to yes.” (But when I asked for clarification, my source then told me “reply hazy, ask again later.”)

The piece addresses that issue by comparing Switzerland to wealthier, more health-conscious states like Connecticut and Massachusetts. Which, by the way, happen to be among the costliest health-care states in the Union…

If your argument is that demography is more important than policy, why are liberals so consumed with dramatic changes to our policies? I think there’s something to the fact that Obamacare will do little to change health outcomes for the poorest Americans. If you disagree, then you’re being inconsistent.

I agree, Health insurance coverage isnt about protecting health, its about protecting access to health care and protecting wealth (i.e. avoifing bankruptcy for the sick). Population health measure have very little to do with health care, but that doesn’t mean you want to be poor, sick and uninsured.

If Herzlinger’s public or business actions had genuinely promoted a Swiss type health system rather than acting as a sop to the right-wing HSA-CDHP crowd in the US who depend on underwritten rather than risk adjusted systems, she might be worth taking seriously.

As it is, all of these ideas were promoted long before she started writing on the topic by Alain Enthoven at Stanford. And if you want to actually see a proper system, the Dutch moved towards the Enthoven model — rather than the Swiss,

And of course both of them regulate insurers WAY MORE than we’re about to via the exchanges. And dont you think the ACA is closet communism Avik?

Ha ha Avik. I havent started name calling yet! (although I think name calling is all part of the fun that makes blogging more interesting than 90% of writing if all done in good fun!) I apologize for tarring you with the brush that is true for the majority on Americans on the right–they believe that the ACA is tantamount to socialism. Surely you noticed the reaction that JD Kleinke got when he pointed out it was basically a right wing idea, and involved relatively little regulation.

All I’m saying is that no one in America on the right or in industry would put up with the amount of regulation seen in Switzerland, the Netherlands or anywhere else–given their reaction to the very light regulations that came with them getting 30m more customers.

I am thought guilty as charged in name calling about Herzlinger but she gives better than she gets…..

I thought Kleinke’s piece was pretty superficial. Particularly his cheap shot about the contraception mandate. And in my ideal world, we’d have something more market-oriented than Switzerland. But we’re not in my ideal world, and my argument is that Switzerland is a middle ground that both sides can live with. My position, suffice it to say, is not the consensus conservative position (though I have garnered some meaningful support, and hope to persuade other conservatives of it over time).

As to Obamacare: if Obamacare had paired the exchanges with a gradual migration of the Medicare & Medicaid populations into those exchanges, that would have been a truly bipartisan bill. But instead Medicaid was dramatically expanded and Medicare was left structurally intact. That bipartisan approach would have resulted in less health-care spending than before: something that conservatives would have loved, and could have achieved truly universal coverage.

If Matt Holt knew anything about the actual workings of our healthinsurance system versus the partisan agenda he pushes he would know most HSAs are provided through employment which is not underwritten at the individual level. Wal Mart or CAT, both larger them most Swiss Insurers, providing an HSA to their employees would be no different then a Swiss Insurer providing it to the general public. Neither individual would be underwritten.